Replacing the Home Mortgage Interest Deduction

In this policy proposal — part of The Hamilton Project‘s 15 Ways to Rethink the Federal Budget — Alan Viard proposes to replace the mortgage interest deduction with a refundable credit as a way to reduce the artificial incentive for the construction of high-end homes by better targeting the tax breaks for housing.

IMPACT

Deficit Reduction (10-year): $300 billion

Broader Benefits: Reduces the artificial incentive for the construction of high-end homes by reducing and better targeting the tax breaks for housing.

The federal tax treatment of owner-occupied housing cries out for reform. Current tax policy offers unwarranted subsidies for the purchase of expensive homes by high-income taxpayers, but does little to promote homeownership by those of more modest means. To address these problems, I propose to replace the mortgage interest deduction with a 15 percent refundable credit and to reduce the size of the mortgages eligible for the credit while providing transition relief. Although this proposal is not ideal in every respect, it offers an effective way to scale back and better target the tax system’s housing tax breaks while raising revenue in a progressive manner. Over ten years, such a proposal could increase revenues by approximately $300 billion.